Apple Reportedly Taps Pegatron for Low-Cost iPhone Model

By Bryan Chaffin

May 30th, 2013 8:26 PM EDT

Apple has reportedly tapped Pegatron for production of a rumored low-cost iPhone model, according to The Wall Street Journal. Citing unnamed "sources familiar with the matter," the financial newspaper said that Apple CEO Tim Cook wants to diversify risk and save money by taking the new mobile device to a manufacturer other than Foxconn.

The report said that problems producing the iPhone 5 at Foxconn, including scratches on the metal casing of the device, played a role in the decision. To gain Apple's business, Pegatron was also willing to accept an even lower margin for making the device than Foxconn has.

Of Low Cost iPhones

Apple hasn't announced a low-cost iPhone, just as it hasn't announced the iPhone 5S as a successor to the iPhone 5. Rumors have been heating up about both devices, and we judge the low-cost iPhone a virtual certainty at this point. The report said that it would be released later this year.

Apple has had trouble in emerging markets, especially the so-called BRIC nations—Brazil, Russia, India, China—in part because carriers in those markets don't generally subsidize new phones. If Apple can make a device with the right margins at the right retail price, it could see sales of the iPhone grow significantly in those markets.

We should note, however, that there is precisely zero chance that Apple will compete at the low end of the smartphone market where there are no profits. On Tuesday, Apple CEO Tim Cook waxed eloquent on his company's passion for making the best possible product, and he compares US$50 smartphones to feature phones.

We expect the so-called low-cost iPhone to have a retail price closer to the $300 mark. The iPhone 5 starts at $649 in the U.S. when unsubsidized. $300 would position such a device in the middle of the market.

Pegatron

Pegatron has long done business with Apple. The iPad mini, introduced in September 2012, was being made by the company. The Wall Street Journal said that yield issues resulted in Foxconn eventually picking up "the bulk" of iPad mini production.

It would seem that Apple is ready to give Pegatron another try, however. In the past, Pegatron has also made laptops, including the original iBook portable Mac in 1999. The article includes an anecdote describing the effects of an earthquake in Taiwan that knocked out power to the iBook production facility.

"At that time, there were a lot of Apple people in my factory, telling us to find a solution," Pegatron Senior Vice President Andy Tsai said. "I bought a lot of power generators, and we even used candles on the packing line."

Good times, no doubt.

Like Foxconn, Pegatron manufactures goods for a number of companies, including Microsoft, HP, and Dell. The company was spun off by computer maker Asustek in 2010 under pressure from its manufacturing clients to do so.